Educational Articles

Volatile Alternative Energy Stocks

James A. Flood
| May 19, 2014

Looking for Volatility? Try These Alternative Energy Stocks.

Are you an investor that likes to take big risks? Do you have a rainy day fund stashed away for a trip to Las Vegas or you weren’t able to make that planned visit to Churchill Downs (CHDN) for the Kentucky Derby? Are you interested in stocks that can trade below $1 a share? If the answer to these questions is yes, then you might want to take a look at these equities that have been aptly labeled “casino stocks”.

Plug Power (PLUG), FuelCell Technologies (FCEL), Ballard Power Systems (BLDPD), Hydrogenics Corp. (HYGS), and to some degree Quantum Fuel Systems Worldwide (QTWW) all, more or less, fit into this category. Again, these equities are best suited for those who like to take risk. Single hitters and people who only make Place and Show bets at the track should look elsewhere. These plays are specifically for investors who swing for the fences knowing that they will either strike out or hit a home run.

To be an owner of these shares you must have a very high risk tolerance. You also have to be willing to live with companies that have some or all of the following characteristics: weak finances, ill-defined earnings prospects, and a heavy dependence upon government subsidiaries (which can change depending upon the party in power).

All of the corporations mentioned below are in the alternative energy sector. Stocks in this segment of the power industry have experienced incredible volatility in the recent past. The following table shows the recent stock prices and trading ranges over the past year.

Price /

Recent52-Week Trading Range /

Median /

% from Median

FuelCell Energy

$2.11

$0.99 - $4.74

$2.87

-26%

Plug Power Inc.

$3.81

$0.15 - $11.72

$5.94

-36%

Ballard Power

$3.13

$0.91 - $8.38

$4.65

-33%

Hydrogenics Corp.

$14.89

$8.07 - $35.52

$21.80

-32%

Quantum Fuel Systems

$3.52

$1.85 - $11.25

$6.55

-46%

Worldwide

As can be seen from the wide ranges that these stocks have traded in over the last year, we have clearly not been exaggerating. Another attribute that pops out is that the price of the five equities are between 26%-46% below the median price of the past 52 weeks.

What business are these companies in? In one form or another, all are involved in “clean” fuel cell technology. Fuel cells are battery-type devices that are used to generate power. Not only do these cells manufacture electricity, but they produce it without much of a carbon footprint. Hence, they can be classified as ‘’green energy” concerns. Being in this category, makes them eligible for some form of subsidiaries from the federal government. Many states also offer incentives for “green power” as well.

These stocks tend to attract individual investors. Institutional accounts (mutual funds, pension accounts, and hedge funds) are not involved with these issues for two reasons. First, the market capitalization of each entity is too small. For a large fund to invest in one of these companies, they would end up driving the stock price higher. Second, they would own most of the company’s outstanding shares, going against the diversification mandates that most of them must abide by.

Because there isn’t much institutional ownership, Wall Street analysts typically don’t follow these companies. Thus, a small market cap stock can often end up trading on rumor and unfounded speculation. Often, partisan investors will fill up certain companies’ message boards and other sites with the express purpose of moving the stock in a direction that will favor them.

The recent issuance of stock by FuelCell and Plug and a shelf registration by Hydrogenics can be seen as red flags to certain investors. True, new equity bolstered a firm’s capital base, but it also dilutes share earnings. Additionally, it can provide an insight into management’s thinking. If a company firmly believes that its stock has a lot of room to grow, why issue new shares? Logically, wouldn’t a management team that believes its stock is heading upward refrain from an equity offering because it expects the share price will be a lot higher in the not too distant future?

Some investors looked unfavorably upon FuelCell’s 25 million new shares issuance on January 17th at $1.25 each. The offering increased its share base by more than 10%. Likewise, Plug Power ‘s recent sale of up to 26 million new shares at $5.50, increased shares outstanding by over 20%, and led some to think that the company’s management believed its stock price was near a peak. On March 31st, Hydrogenics filed papers stating that it may issue up to $100 million worth of debt and/or equity.

Plug Power shares soared in January when it was revealed that the world’s biggest retailer Wal-Mart (WMT - Free Wal-Mart Stock Report) was behind a large order for 1,700 fuel cells to power forklifts at six of its locations. Though FuelCell did not sell any similar type of equipment to Wal-Mart, its stock rose in tandem with Plug’s. To highlight the volatility, when FuelCell last reported earnings, the stock soared upward before crashing. All in all, on the day, the share price moved a whopping 37%.

Being involved with these companies means looking past their current situation and making a bet that demand for green energy (specifically fuel cells) will continue to increase. Choosing the right time to invest in this industry is incredible difficult. Over the past decade, this sector has enjoyed incredible runs as investors thought the next technological breakthrough was just around the corner or that the companies were going to start posting consistent earnings. Indeed, billions of dollars has been lost by investors who chose their entry and exit unwisely.

At present, we find it hard to recommend any of these stocks to the typical investor because the prospects are too uncertain and the risks are too great. With that said, it doesn’t mean that there isn’t a tremendous opportunity here whether wagering for or against these stocks. Just step right up and place your bets.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.